Emerging Negotiation & Retirement Tools for Community Colleges during Challenging Times

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1 Emerging Negotiation & Retirement Tools for Community Colleges during Challenging Times 2017 Fall Institute October 18, 2017

2 Session presenters Debbie Fry Director, Management Consulting Services School Services of California Eric O Leary Senior Vice President, Consulting PARS (Public Agency Retirement Services) Dr. Albert J. Román Vice Chancellor, Human Resources Los Angeles Community College District 2017 fall institute 2

3 Economics and human resources 1 State Economic Overview 2 Federal budget and related issues 2017 fall institute 3

4 ECONOMIC OVERVIEW California s revenues continue to be fragile and volatile Fragile because we depend so heavily on the top one percent of taxpayers, a group that is not growing Volatile because we rely on sales and income taxes for the marginal dollar, not the less volatile property tax And we have all become skeptical of economic forecasts None of the world s leading economists forecasted the Great Recession None of them forecasted the recovery that began in 2012 And likely none of them will accurately forecast the next recession Governor Jerry Brown s plan is conservative, but still risky because he assumes no recession over the next three years For these reasons, we are more conservative than the Governor, and we think you should be too 2017 fall institute 4

5 OTHER CONSIDERATIONS Immigration policy, for example, has many potential effects Cost to the state for lost federal support Enrollment impacts for local educational agencies Federal tax policy often has unintended consequences for state tax collections The Democratic supermajority has already flexed its power in passing the gas tax; how will that power be used next? 2017 fall institute 5

6 ECONOMIC TRENDS The Good The Bad The Feds Unemployment continues to decline Most economic indicators remain positive Continued low energy prices, interest rates, and a strong U.S. dollar provide a significant upside for economic growth The Governor continues to warn that another recession is just around the corner The risk inherent in the capital gains forecast of the State Budget could come back to bite education Withdrawal from the Paris Climate Agreement Still nothing new on the Trump Tax Plan Health care is up in the air 2017 fall institute 6

7 STATE BUDGET RESERVES 2 A $1.8 billion contribution to the Rainy Day Reserve (officially known as the Budget Stabilization Account) brings the Reserve to $8.5 billion 1 The Governor continues to place California on more secure footing for his oft predicted recession 3 Proposition 2, passed by state voters in 2014, requires (1) a base contribution of 1.5% of General Fund revenues and (2) an amount based on capital gains revenues in excess of 8% of General Fund taxes 4 The Reserve now stands at 66% of the maximum goal of 10% of General Fund revenues 6 Governors know that big reserves present a target for both political parties; however, Governor Brown notes that much of the new spending... is one-time in nature, which avoids ongoing commitments that would put pressure on the budget 5 The Budget Act also contains $1.4 billion in the Special Fund for Economic Uncertainties thus, total reserves for are $9.9 billion 2017 fall institute 7

PROPOSITION 98 MINIMUM GUARANTEE Proposition 98 funding for

3%) increase from last year s revised Budget However, the

pain, equal gain ensures that, in a year when Test 3B

growth in all other state-funded programs on a per-capita

8 PROPOSITION 98 MINIMUM GUARANTEE Proposition 98 funding for is $74.5 billion, a $3.1 billion (4.3%) increase from last year s revised Budget However, the Legislature and Governor suspended Test 3B Test 3B equal pain, equal gain ensures that, in a year when Test 3B applies, growth in K-14 funding is at least as great as growth in all other state-funded programs on a per-capita basis : $69.1 billion : $71.4 billion : $74.5 billion 2017 fall institute 8

9 SUSPENSION OF PROPOSITION 98 TEST 3B The Legislative Analyst s Office has noted that Test 3B has been operative six times The adopted Budget suspends Test 3B through (estimated at $900 million) In alone, this test provided $1.4 billion to the minimum funding guarantee The reduced funding will be added to the Maintenance Factor However, education is not fully restored and will ultimately receive less than if suspension did not take place, as it lowers the minimum funding guarantee 2017 fall institute 9

10 CALIFORNIA COMMUNITY COLLEGE ONE-TIME FUNDS $150 million for the Guided Pathways Program $76.9 million for deferred maintenance or instructional equipment, with no match requirement $46.5 million for Proposition 39 energy efficiency program grants $20 million for an Innovation Awards Program $5 million for Veterans Resource Centers ($5 million of $10 million is one time) $6 million for an Integrated Library System 2017 fall institute 10

11 ONE-TIME FUNDS One-Time funds should be treated as just that here today gone tomorrow We ve received some generous one-time funds during the economic recovery, but we shouldn t expect them to continue as we near a more stable economy or an economic downturn One-time funds should not be used for ongoing expenses 2017 fall institute 11

12 CALPERS/CALSTRS One of the largest single expenses in the average district s multiyear projection is the cost of the employer contribution to employee retirement programs The increases in rates shown on the next slide exceed the increased cost of step and column movement, health care, and, in many cases, pay raises Even after these significant employer contribution rate increases, both the California Public Employees Retirement System (CalPERS) and the California State Teachers Retirement System (CalSTRS) are seeing unfunded liabilities continue to grow Lower investment returns and higher pension payments are a difficult combination Will the state continue to provide a base apportionment increase beyond the COLA to help offset these growing costs? 2017 fall institute 12

13 CALPERS AND CALSTRS RATES UPDATES Better than expected investment returns will help mitigate some of the excess cost of CalPERS and CalSTRS in the long term, but will not mitigate rising employer costs Budgeted employer rates will continue to increase CalSTRS 14.43% 16.28% 18.13% 19.10% CalPERS 15.53% 18.10% 20.80% 23.80% 2017 fall institute 13

14 FEDERAL BUDGET PROPOSAL FOR INSTITUTIONS OF HIGHER EDUCATION TRIO Grants reduced by $90 million GEAR UP Grants reduced by $103.1 million Both will still have the funds for continued appropriations Not included in the Proposal: Teacher Quality Partnership Grants Foreign Language Education Child Care Access Means Parents in School Strengthening Institutions Program International Education 2017 fall institute 14

15 FEDERAL ISSUES Speculation about federal action on education and noneducation issues will continue to impact California, and by extension the education budget; for example: Repeal and replacement of the Affordable Care Act Possible federal education reductions placing a squeeze on California resources Immigration policy, which has a huge impact for education in California Domestic and foreign policy changes that could affect the global, national, and California economies The answer is that we know there will be impacts in all these areas, but it is too early to tell which battles will be fought and how they will be decided One thing is certain; California cannot go it alone in our interdependent world 2017 fall institute 15

16 Two solutions to address pension & budget 1 Pension Prefunding Trusts 2 Early Retirement Incentive Plans 2017 fall institute 16

17 STRS/PERS Contribution Rate Increases STRS/PERS rate increases through : 30.00% Fiscal Year STRS PERS % 11.77% 25.00% % 11.85% % 13.89% 20.00% % 15.53% % 18.10% 15.00% % 20.80% 10.00% 5.00% STRS PERS % 23.80% % 25.20% % 26.10% % 26.80% Pension prefunding trusts 2017 fall institute 17

18 How do rate increases affect A District? Annual pension costs increase from $7.0 million to $14.3 million in 8 years. $16,000,000 $14,261,272 $14,000,000 $12,000,000 $10,000,000 $8,000,000 $6,000,000 $7,000, *Based on an initial constant hypothetical STRS contributions of $4 million and PERS contributions of $3 million beginning in and constant payroll thereafter Pension prefunding trusts 2017 fall institute 18

19 Why Prefund Pension Obligations? Address Long-Term Liability STRS/PERS costs are a long term burden, and prudent investment planning is critical to current and future management of obligations Protect from Diversion Funds are protected from diversion to other uses and curtails stakeholder pressure to use funds in other ways Rainy Day Fund Assets can be used as an emergency source of funds for pension-related costs when District revenues are impaired based on economic or other conditions Achieve Better Returns Prefunding with the program enables diversified investments that may achieve greater return Beneficial in Credit Rating & Accreditation Credit rating and accreditation agencies may look more favorably upon districts who take steps to reduce liabilities Pension prefunding trusts 2017 fall institute 19

20 Structure of pension prefunding Trusts I R C SECTION 115 A governmental trust designed specifically to be used for pension prefunding whereby any income derived is tax exempt I R R EVO C A BLE To comply with GASB rules, trust was set up as irrevocable which means that once contributions are placed into trust, assets can only be used for retirement plan purposes DISBURSEMENTS F R O M THE TRUST District should have full control over the amounts and timing of disbursements, providing they are made for pension-related costs District can request that a disbursement be made: Directly to the District (to pay STRS/PERS costs) Directly to STRS/PERS Pay retirement plan administration expenses Pension prefunding trusts 2017 fall institute 20

21 Comprehensive services available When exploring a provider for pension prefunding services, District should look for a company that can provide comprehensive services, such as: Consulting Investment Fiduciary Investment Management Document Preparation Trustee Services Custodian Services Ongoing Compliance Monitoring Disbursement Processing Funding Processing Contribution Processing Pension prefunding trusts 2017 fall institute 21

22 What are early retirement incentive plans? Financial incentives to encourage employees to retire from service earlier than normal to achieve fiscal savings for the District Savings created by: Accelerating rate of natural attrition retirements Replacing the departing employee with lower salary employees Eliminating higher salaried employees to reduce the number of positions otherwise needed to achieve savings Early Retirement Incentive Plans are normally offered to a group of employees deemed eligible based on a set of criteria during a short period of time or window period Early retirement incentive plans 2017 fall institute 22

23 strs golden handshake vs. local controlled Plan Features STRS Golden Handshake Local Controlled Benefit Formula Fixed by Statute District determines Benefit Level (subject to Bargaining) Benefit Payment Options Lifetime and Joint-and-Survivor Options No tax deferred rollovers Eligibility Available to only Academic; Not Classified Must include Administrators Cost Savings Analysis Districts required to certify Net Savings to the County District on their own for the analysis Lifetime, Joint-and-Survivor and Fixed/Period Certain Options IRA/tax deferred rollovers Can offer the same plan to Academic and Classified employees Can exclude groups like administrators, if too costly Vendor should quantify in an understandable way the real costs/savings associated with a plan Vendor should disclose all assumptions Vendor should provide assistance to District on a comprehensive analysis Requirement to Retire Employees must retire Plan can allow employees to only separate and not retire Minimum Participation Requirements No provision to withdraw plan if actual participation does not generate Net Savings Can withdraw plan if actual participation does not meet the fiscal and operational objectives of the District or target number of retirements Early retirement incentive plans 2017 fall institute 23

24 Analysis methodology Total Compensation Differential between Retiring Employee and Replacement Employee Less Less Less Less Plus Equals Retirement Health Care Cost Retirement Incentive Cost Current Natural Attrition Future Loss in Natural Attrition Savings Due to Non-Replacements Net Savings or Cost Early retirement incentive plans 2017 fall institute 24

Number of Employees Sample demographic analysis 30 25 20 15 10 5 0 24 19 17 15 13 13 10 target 8 7 5 5 3 2 2 1 0 55 56

25 Number of Employees Sample demographic analysis target Age of Eligible Employees Early retirement incentive plans 2017 fall institute 25

26 Case study: LACCD s plan 1 What did we offer? 2 Final results/lessons learned 2017 fall institute 26

27 Plan benefit 7 5 % of Base Pay Benefit The District contributed 75% of Base Pay (paid in 5 equal payments over 5 years) into the plan on behalf of all participating employees Sampling of Benefit Options Option Choice Academic Faculty Academic Management Academic Supervisors Classified Non- Management Classified Management Option 1, Lifetime $ $ $ $ $ Option 2, Joint & Survivor $ $ $ $ $ Option 5, 5-Year (IRA rollover) Option 9, 9-Year (IRA rollover) $1, $2, $1, $ $1, $ $1, $ $ $ Option 15, 15-Year $ $ $ $ $ What did we offer? 2017 fall institute 27

28 Plan eligibility Full-time Academic Faculty, Academic Management, Academic Supervisors, Classified Non-Management and Classified Management Have completed 5 full years of District service Are eligible to retire under STRS or PERS Resign from District employment Academic Faculty must complete the Academic Year and resign no later than June 30, 2017 Academic Management, Academic Supervisors, Classified Non- Management and Classified Management resign June 30, 2017 or December 29, 2017 Submit all required enrollment materials and Resignation Form between April 10, 2017 and April 28, 2017 What did we offer? 2017 fall institute 28

29 Adjunct faculty replacement for 1 year Employees could only submit their enrollment materials and Resignation Form during a specific time period April 10 th through April 28 th This was to ensure that Academic Faculty submitted their enrollment materials and Resignation Form within their last 40 duty days This allowed the District the ability to replace Academic Faculty with Adjunct Faculty for 1 year What did we offer? 2017 fall institute 29

30 Number of Employees Over 1600 employees were eligible 120 Eligible Employees Age of Employees What did we offer? 2017 fall institute 30

31 Implementation timeline 1. Board of Trustees approved the plan offering January 25, Enrollment Window opened and January 26, 2017 Individual Packets mailed to eligible employees 3. Employee Orientation Meetings February 14, 2017 through (at each college and ESC) March 1, Resignation Letters could be submitted April 10, 2017 through April 28, Individual Meetings (at each college and ESC) April 10, 2017 through April 24, Enrollment Window closed April 28, Board of Trustees approves/cancels the plan May 10, 2017 based on actual plan participation 8. District announces whether plan goes forward No later than May 26, Employees resign June 30, 2017 or December 29, Benefits commence August 1, 2017 or February 1, 2018 What did we offer? 2017 fall institute 31

32 Implementation language The plan was offered contingent on the District meeting its fiscal and operational objectives If the District determined that the fiscal and operational objectives were not met, the District reserved the right to cancel the incentive and all enrollments/resignations would be voided If the District determined that the fiscal and operational objectives were met, the District would confirm the plan and all enrollments/resignations would be locked in and irrevocable What did we offer? 2017 fall institute 32

33 Number of Employees 364 employees enrolled 45 Enrolled Employees Age of Employees Final results/lessons learned 2017 fall institute 33

34 Final fiscal analysis results Actual Enrollment Number of Eligible Employees Actual Retirements with PARS SRP Percentage Retirements 1, % Projected Fiscal Impact Projected Positions Not Replaced Projected Net Savings in Year 1 Projected Net Savings over 3 Years Projected Net Savings over 5 Years $6,533,805 $9,454,493 $9,957,872 Final results/lessons learned 2017 fall institute 34

35 Important items to remember Work with your employee groups/unions to get buy-in and support Provide sufficient window period so that employees have enough time to make this important decision Coordinate meetings/counseling with STRS/PERS whether to retire under STRS/PERS is still the most important decision during this process Bring in District staff to be able to answer questions related to District matters like continuation of health benefits, etc. Work on the message and how it is disseminated printed packets sent to all eligible employees, FAQs, website, group meetings with presentations, one-on-one meetings, etc. Work carefully with your Board to make sure you keep them updated throughout the whole process District needs to watch the FON and 50% Rule Final results/lessons learned 2017 fall institute 35

Opportunity to restructure/reorganize at colleges and ESC Increase technology

36 Objectives met Overall objectives of the Plan were: Further diversify staff and administrators Replace retirees with staff and administrators where needed Opportunity to restructure/reorganize at colleges and ESC Increase technology awareness in support of Millennials and Generation Z Final results/lessons learned 2017 fall institute 36

For questions, please contact Dr. Albert J.

School Services of California DebbieF@sscal.

37 For questions, please contact Dr. Albert J. Román Vice Chancellor, Human Resources Los Angeles Community College District RomanA (213) Debbie Fry Director, Management Consulting Services School Services of California (916) Eric O Leary Senior Vice President, Consulting PARS (Public Agency Retirement Services) EOleary@pars.org (800) ext fall institute 37

Managing Your OPEB & Other Benefit Liabilities

Managing Your OPEB & Other Benefit Liabilities Eric O Leary, PARS Debbie Fry, School Services of California Teri Burns, CSBA October 18, 2016 Today s Presenters Eric O Leary Senior Vice President, PARS